On July 29, the Federal Reserve decided to keep interest rates unchanged, near zero. Now investors in bank shares such as Wells Fargo (NYSE:WFC) stock are wondering what may be next for financial companies in August.
Year-to-date, WFC stock is down nearly 55%. By comparison, the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is down about 21%.
The financial industry is highly cyclical and thus susceptible to changes in economic climate. Variables such as interest rates, economic growth, global health, political and trade worries and activity in the housing markets can impact a financial institution’s stock price.
On July 14, the bank reported disappointing second-quarter results. Therefore if you aren’t a shareholder yet, you may want to wait before committing new capital into the business.
WFC stock is likely to go below $25 in the coming weeks. Here’s why.
How Q2 Results Came
San Francisco, California-headquartered Wells Fargo’s revenue was $17.8 billion, down from $21.6 billion in second quarter 2019. Net loss came at $2.4 billion, translating into a diluted loss per share of 66 cents. Analysts were expecting a loss of 20 cents.
The bank reported net income in three segments:
- Community banking;
- Wholesale banking; and
- Wealth and investment management.
Investors weren’t impressed by results from any of these divisions.
The bank also reduced its third quarter 2020 common stock dividend to 10 cents per share from 51 cents per share. On June 25, the Federal Reserve had announced the results of its annual stress tests and additional sensitivity analyses for banks, such as Wells Fargo.
Although the Street was ready for a dividend cut, this reduction was deeper-than-expected. CEO Charlie Scharf said:
“We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter.”
Overall, management was quite pessimistic about the coming year. Following the results, WFC stock has been trending downward.
The Black Sheep of the Industry
InvestorPlace’s Louis Navellier recently wrote in detail about Wells Fargo’s past and current problems. He highlighted how, “Wells Fargo has a checkered history, at best. It’s been in trouble with financial regulators and Congress for years, dating back to the mortgage crisis that launched the Great Recession of 2008-09.”
Recent research by Brian Tayan of Stanford University takes a closer look at the 2013 cross-selling scandal. It was initially alleged that a number of Wells-Fargo employees in southern California were using aggressive tactics to meet the bank’s daily cross-selling targets. However, the problems went beyond a couple of employees and became an issue of corporate culture.
Over the past several years, Wells Fargo settled the financial side of the scandal with various government and state entities as well as consumers. Yet, Wall Street has been questioning the state of corporate governance at the bank. And investors are not happy that the bank makes headlines with accountability issues.
Per Tayan, “The dollars involved in the Wells Fargo cross-selling scandal were small… but the reputational damage to the bank was massive.”
The current economic climate won’t allow Wells Fargo or any other bank to make headlines with scandals and emerge unscathed. Therefore, management has to be especially careful about protecting customers as well as shareholders in the coming months.
In the past decade, Wells Fargo stock has mostly reflected various issues the bank has faced. Yet amid the difficulties, many long-term investors have possibly chosen to stay with the group, in part due to its robust dividends. Now that the passive income element is gone, dividend-seeking investors may look for alternatives.
The Bottom Line Wells Fargo Stock
The bank’s recent results did not offer much optimism for shareholders. And Wells Fargo stock has been lagging its peers for some time. Although the fundamental valuation of the bank makes it look cheap on paper, that doesn’t necessarily mean the shares offer value at this point.
Short-term technical charts indicate Wells Fargo stock is likely to trade a range between $22.50 and $25.0.
If you’re currently a shareholder, you may want to ride the wave. Alternatively, if you are experienced with options, you may initiate a covered call.
An ATM covered call position, for example, with a six-week time horizon could give you time to analyze the quarterly results. A September 18-expiry covered call would also decrease the volatility in your portfolio, offer some downside protection, and also enable you to participate in a potential up move.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.